I love when I find a tax article that points out an idea that I hadn’t thought about before. I really like it when that same article gives me more than one thinking point.
CCHGroup.com recently posted an article about a couple who lost their dependency exemptions and credits that went with them because their children were not US citizens. The taxpayers, living in Israel at the time, believed that since one parent was an US citizen and that made the children eligible to become citizens, they qualified as citizens. The Tax Court disagreed (L.M. Carlebach, 139 TC No. 1, Dec. 59,127). The court said the children had to have US citizenship in any year they are claimed as dependents. The right to be a citizen doesn’t make the kids citizens for the dependent exemptions.
While the article outlined the penalties added to the couple’s new balance due, they mentioned the taxpayers were also hit with a failure to file penalties. The returns in question were filed late without any extensions filed. But since the returns originally had refunds, they weren’t subject to a late filing penalty at that time. But when the taxpayers lost the dependent exemptions and credits, the refunds became balance dues and subject to late filing penalties. The fact that they thought they were due refunds didn’t show the IRS and TC that they had “establish(ed) reasonable cause or the absence of willful neglect” which would allow the late filing penalties to be waived.
While I probably won’t see too many clients with the dependent citizen problem, I do see clients who won’t file an extension because they are sure they will have a refund. It might not be a bad idea to remind them that can change later. An extension might not solve the problem but it wouldn’t hurt.